Walmart Is Learning the Hard Way That Service Matters

If you’re like most consumers, at some point you’ve complained to a service provider or retailer, ultimately threatening to never patronize that business again.

And, if you’re like more than 90% of grumbling customers, you’ll never actually follow through on that threat.

Sometimes, though, service and selection remain so consistently bad that consumers have little choice but to permanently give up on patronizing a particular business. Walmart (NYSE:WMT[1]) is dancing dangerously close to that line in the sand for too many current customers.

In fact, it’s so bad that investors should start to worry, too.

Doing Nothing Right

That the world’s largest retailer struggles when it comes to customer service isn’t exactly breaking news. Indeed, Walmart has something of a history of customer-centric snafus ever since the retailer became more of a corporation and less of a family business (that happened sometime in the early ’90s).

Within the past couple of years, however, bad customer service and sloppy management has taken on a whole new meaning for Walmart.

For starters, Walmart is missing too many items on its shelves[2]. Although the company had responded to criticisms about its empty shelves by denying it’s a problem, the CEO of its U.S. division — Bill Simon — acknowledged in early March that the company isn’t keeping its shelves stocked as well as it could.

The irony is, it’s not that the merchandise isn’t in the store. It’s just stuck in stockrooms.

According to some reports, it’s not unusual for pallets and pallets of goods to pile up in Walmart stores’ backrooms because there simply aren’t enough employees to handle it all. Bloomberg recently posted an outright alarming statistic[3]: since 2008, the number of Walmart stores grew 13%, while the number of employees has grown less than 2%. No matter how you slice it, the math simply doesn’t make sense.

Then again, perhaps having fewer employees around means less opportunity to offend customers.

There are countless examples of Walmart employees treating the stores’ patrons poorly, but perhaps none so much as the recent incident where a breast cancer survivor was forced to show her mastectomy scars to employees[4].

Trying to return a $13 book she received as a gift, the customer was asked to produce a picture ID, as she did not have a receipt for the book. Problem: Her chemo changed her hair color from blond to brown, and it wasn’t as long as it was in her driver’s license picture. Several of the store’s employees doubted it was actually her ID, forcing the cancer patient to fully explain her ordeal, up to and including showing the Walmart workers her surgery scars.

An isolated incident? Perhaps. Perhaps not.

While it would be easy to dismiss the unfortunate turn of events as bad luck for the company, too many recent Walmart patrons who have had similar experiences (though none as cruel) aren’t surprised enough that such a thing could happen at a Walmart store.

Lesson Learned

What’s going on at Walmart now might be something its competitors bear in mind … forever.

One of the goals of small companies is to achieve a so-called “economy of scale,” where revenue grows to a point where variable costs as well as fixed costs are more than covered. Since fixed costs are, well, fixed, any future revenue growth will at least somewhat widen corporate margins.

There might be a limit to the upside of an economy of scale, however.

At the other end of the business-efficiency spectrum is the “law of diminishing returns.” Although the idea usually applies to manufacturers, it can also apply to a mega-retailer like Walmart.

In simplest terms, the law of diminishing returns says there comes a point where the size of an operation is a liability rather than an asset. While Walmart’s growth into a 10,792-store company might have achieved an optimal economy of scale along the way, it’s pretty clear now that the retailer is suffering from an excessive size. Out-of-touch management, labor unrest, restocking headaches[5], ridiculously long checkout lines and market saturation are all symptoms of the problem of size. So are waning same-store sales[6]. So is the fact that frustrated customers are laying merchandise down and walking out of the stores empty-handed.

And yes, Walmart, it is happening.

Of all the stumbling blocks Walmart is tripping over, though, it’s ultimately its front-line people (and a lack of them) that are breaking the company. While intangible, it matters. It just takes a while for its importance to become clear.

Of course, customer service is the toughest thing in the world to teach and maintain, particularly when you don’t make a concerted point of doing it. Sooner or later, Target (NYSE:TGT[7]) and Costco (NASDAQ:COST[8]) are going to exploit Walmart’s failing.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.